Created By Dr. Raavi Jain

1. 11
LAW OF DEMANDLAW OF DEMAND

2. LAW OF DEMANDLAW OF DEMAND
i.i. Definition of the law of demandDefinition of the law of demand
ii.ii. Assumptions of the law of demandAssumptions of the law of demand
iii.iii. Demand scheduleDemand schedule
iv.iv. Demand curveDemand curve
v.v. Determinants of demandDeterminants of demand
vi.vi. Importance of law of demand:Importance of law of demand:
vii.vii. Exceptions to the law of demandExceptions to the law of demand 22

3. • Demand-Demand- the desire to own somethingthe desire to own something
AND the ability to pay for it.AND the ability to pay for it.
• The Law of DemandThe Law of Demand
THE LAW OF DEMANDTHE LAW OF DEMAND
PRICE
GOES
UP
DEMAND
GOES
DOWN
AND….
As price
goes down,
you
demand
more of
something!

4. 44
THE LAW OF DEMANDTHE LAW OF DEMAND
 The law of demand states that, if all other factors remainThe law of demand states that, if all other factors remain
equal, the higher the price of a good, the lessequal, the higher the price of a good, the less people willpeople will
demand that good. In other words, the higher the price,demand that good. In other words, the higher the price,
the lower the quantity demanded i.e. there is an inversethe lower the quantity demanded i.e. there is an inverse
relationship between the price and the quantityrelationship between the price and the quantity
demanded.demanded.
 The amount of a good that buyers purchase at a higherThe amount of a good that buyers purchase at a higher
price is less because as the price of a good goes up, soprice is less because as the price of a good goes up, so
does the opportunity cost of buying that good. As adoes the opportunity cost of buying that good. As a
result, people will naturally avoid buying a product thatresult, people will naturally avoid buying a product that
will force them to forgo the consumption of somethingwill force them to forgo the consumption of something
else they value more. Thus, the curve is downwardelse they value more. Thus, the curve is downward
sloping.sloping.

5. 55
DEFINITION OF THE LAW OFDEFINITION OF THE LAW OF
DEMANDDEMAND
According toAccording to Prof. SamuelsonProf. Samuelson, “, “The law ofThe law of
demand states that people will buy more atdemand states that people will buy more at
lower prices and buy less at higher prices,lower prices and buy less at higher prices,
other things remaining the same".other things remaining the same".

6. THE LAW OF DEMANDTHE LAW OF DEMAND

7. 77
ASSUMPTIONS OF THE LAWASSUMPTIONS OF THE LAW
OF DEMANDOF DEMAND
The main assumptions are:The main assumptions are:
• Habits, tastes, preference and fashions of theHabits, tastes, preference and fashions of the
consumer remain constant.consumer remain constant.
• Money, income of the consumer does not change.Money, income of the consumer does not change.
• Prices of other goods (related goods) remainPrices of other goods (related goods) remain
constant.constant.
• The commodity in question has no substitute.The commodity in question has no substitute.
• The commodity is a normal good and has noThe commodity is a normal good and has no
prestige or status value.prestige or status value.
• People do not expect changes in the prices in future.People do not expect changes in the prices in future.

8. 88
Demand ScheduleDemand Schedule
• The demand schedule is a list or table of theThe demand schedule is a list or table of the
different amounts of the commodity that aredifferent amounts of the commodity that are
purchased in the market at different prices.purchased in the market at different prices.
• The demand schedule is of two types:The demand schedule is of two types:
1.1.Individual Demand ScheduleIndividual Demand Schedule
2.2.Market Demand ScheduleMarket Demand Schedule

9. 99
1. INDIVIDUAL DEMAND1. INDIVIDUAL DEMAND
SCHEDULESCHEDULE
• "The individuals demand for a commodity is
the amount of a commodity which the
consumer is willing to purchase at any given
price over a specified period of time".
• The individual's demand for a commodity
varies inversely price ceteris paribus. As the
price of a goods rises, other things remaining
the same, the quantity demanded decreases
and as the price falls, the quantity demanded
increases.

10. • The schedule which depicts the individualThe schedule which depicts the individual
demand isdemand is known as Individualknown as Individual
Demand Schedule.Demand Schedule.
• It can be explained with the help ofIt can be explained with the help of
following schedule:following schedule:
1010

11. 1111
INDIVIDUAL DEMAND SCHEDULE
Explanation:
According to this demand schedule, an individual
buys 5 shirts at Rs.100 per shirt and 30 shirts at
Rs.10 per shirt in a year.

12. 1212
2. MARKET DEMAND2. MARKET DEMAND
SCHEDULESCHEDULE
• TheThe market demandmarket demand for a commodity is obtainedfor a commodity is obtained
by adding up the total quantity demanded atby adding up the total quantity demanded at
various prices by all the individuals over avarious prices by all the individuals over a
specified period of time in the market. It isspecified period of time in the market. It is
described as the horizontal summation of thedescribed as the horizontal summation of the
individuals demand for a commodity at variousindividuals demand for a commodity at various
possible prices in market.possible prices in market.
• The horizontal summation of individuals demandThe horizontal summation of individuals demand
for a commodity will be thefor a commodity will be the market demand for amarket demand for a

13. • The schedule which depicts theThe schedule which depicts the
market demand ismarket demand is known as Marketknown as Market
Demand Schedule.Demand Schedule.
• It can be explained with the help ofIt can be explained with the help of
following schedule:following schedule:
1313

14. 1414
MARKET DEMAND SCHEDULE
Explanation:
In the above schedule, the amount of commodity demanded by four buyers
(which we assume constitute the entire market) differs for each price When the
price of a commodity is Rs.10, the total quantity demanded is 40 thousand
units per week. At price of Rs. 2, the total quantity demanded increases to 180
thousand units.

15. 1515
DEMAND CURVEDEMAND CURVE
• Demand curveDemand curve is a graphicis a graphic
representation of the demand schedule.representation of the demand schedule.
• According to Lipsey,According to Lipsey, "The curve, which"The curve, which
shows the relation between the price of ashows the relation between the price of a
commodity and the amount of thatcommodity and the amount of that
commodity the consumer wishes tocommodity the consumer wishes to
purchase is called demand curve".purchase is called demand curve".
• The demand curve is of two types:The demand curve is of two types:
1.1. Individual Demand CurveIndividual Demand Curve

16. 1616
1. INDIVIDUAL DEMAND CURVE1. INDIVIDUAL DEMAND CURVE
• Individual Demand curveIndividual Demand curve is a graphicis a graphic
representation of the individual demandrepresentation of the individual demand
schedule.schedule.
• It can be explained with the help ofIt can be explained with the help of
following curve:following curve:

17. INDIVIDUAL'S DEMAND CURVE
The DD demand curve slopes downward from left to right. It has a negative slope showing that
the two variables price and quantity work in opposite direction. When the price of a good rises,
the quantity demanded decreases and when its price decreases, quantity demanded increases,
ceteris paribus.

18. 1818
2. MARKET DEMAND CURVE2. MARKET DEMAND CURVE
• Market demand curveMarket demand curve for afor a
Commodity is the horizontal sum ofCommodity is the horizontal sum of
individual demand curves of all theindividual demand curves of all the
buyers in a market. buyers in a market.
• It can be explained with the help ofIt can be explained with the help of
following curve:following curve:

19. MARKET DEMAND CURVE
At price of Rs.10, the quantity demanded in the market is 40 thousand
units. At price of Rs.2.0. it increases to 180 thousand units. In other words,
the lower the price of the good X, the greater is the demand for it.

20. CAUSES OF THE APPLICATION OFCAUSES OF THE APPLICATION OF
THE LAWTHE LAW
The demand curve generally slopes downward fromThe demand curve generally slopes downward from
left to right. It has a negative slope because the twoleft to right. It has a negative slope because the two
important variables price and quantity work inimportant variables price and quantity work in
opposite direction. As the price of a commodityopposite direction. As the price of a commodity
decreases, the quantity demanded increases over adecreases, the quantity demanded increases over a
specified period of time, and vice versa, other ,specified period of time, and vice versa, other ,
things remaining constant.things remaining constant. The fundamentalThe fundamental
reasons for demand curve to slope downward are asreasons for demand curve to slope downward are as2020

21. CAUSES OF THE APPLICATION OF THECAUSES OF THE APPLICATION OF THE
LAWLAW
1.1. LAW OF DIMINISHING MARGINALLAW OF DIMINISHING MARGINAL
UTILITYUTILITY
2.2. INCOME EFFECTINCOME EFFECT
3.3. SUBSTITUTION EFFECTSUBSTITUTION EFFECT
4.4. DIVERSE USES OF A COMMODITYDIVERSE USES OF A COMMODITY
5.5. CHANGE IN THE NUMBER OFCHANGE IN THE NUMBER OF
2121

22. The law of demand is based on theThe law of demand is based on the
law of diminishing marginal utilitylaw of diminishing marginal utility. According to the. According to the
cardinal utility approach, when a consumer purchases morecardinal utility approach, when a consumer purchases more
units of a commodity, its marginal utility declines. Theunits of a commodity, its marginal utility declines. The
consumer, therefore, will purchase more units of thatconsumer, therefore, will purchase more units of that
commodity decrease in price brings about an increase, incommodity decrease in price brings about an increase, in
demand. The demand curve, therefore, is downwarddemand. The demand curve, therefore, is downward
sloping.sloping.
2222
1.1. LAW OF DIMINISHING MARGINALLAW OF DIMINISHING MARGINAL
UTILITYUTILITY

23. 2.2. INCOME EFFECTINCOME EFFECT
Other things being equal, when the price of a commodityOther things being equal, when the price of a commodity
decreases, the real income or the purchasing power of thedecreases, the real income or the purchasing power of the
household increases.household increases. The consumer is now in a positionThe consumer is now in a position
to purchase more commodities with the same income.to purchase more commodities with the same income.
The demand for a commodity thus increases not only from theThe demand for a commodity thus increases not only from the
existing buyers but also from the new buyers who were earlierexisting buyers but also from the new buyers who were earlier
unable to purchase at higher price. When at a lower price,unable to purchase at higher price. When at a lower price,
there is a greater demand for a commodity by the households,there is a greater demand for a commodity by the households,
the demand curve is bound to slope downward from left tothe demand curve is bound to slope downward from left to2323

24. 3. SUBSTITUTION EFFECT3. SUBSTITUTION EFFECT
The demand curve slopes downward from left to rightThe demand curve slopes downward from left to right
also because of the substitution effect. For instance, thealso because of the substitution effect. For instance, the
price of meat falls and the prices of other substitutes sayprice of meat falls and the prices of other substitutes say
poultry and beef remain constant. Then the householdspoultry and beef remain constant. Then the households
would prefer to purchase meat because it is nowwould prefer to purchase meat because it is now
relatively cheaper. The increase in demand with a fall inrelatively cheaper. The increase in demand with a fall in
the price of meat will move the demand curve downwardthe price of meat will move the demand curve downward
from left to right.from left to right.
2424

25. 4. DIVERSE USES OF A4. DIVERSE USES OF A
COMMODITYCOMMODITY
• A commodity tends to be used more, whenA commodity tends to be used more, when
it becomes cheaper.it becomes cheaper.
• For example: if the price of electricity perFor example: if the price of electricity per
unit falls, then it may be used for a numberunit falls, then it may be used for a number
of purposes. Eg. Coolers, fans, A.C.of purposes. Eg. Coolers, fans, A.C.
2525

26. 5. CHANGE IN THE NUMBER5. CHANGE IN THE NUMBER
OF CONSUMERSOF CONSUMERS
When the price of a commodity falls, itsWhen the price of a commodity falls, its
demand not only increases from the olddemand not only increases from the old
buyers but the new buyers also enter thebuyers but the new buyers also enter the
market.market. The combined result of the income andThe combined result of the income and
substitution effect is that demand extends, ceterissubstitution effect is that demand extends, ceteris
paribus, as the .price falls. The demand curveparibus, as the .price falls. The demand curve
slopes downward from left to right.slopes downward from left to right. 2626

27. 2727
DETERMINANTS OF DEMANDDETERMINANTS OF DEMAND
DEMAND FUNCTIONDEMAND FUNCTION
The demand function for a good is the relationship between the
various amounts of the commodity that might be bought and the
determination of those amounts in a given market and a given
period of time.
Qdx = f (Px, Y, Po, T, E )Qdx = f (Px, Y, Po, T, E )
Here:
• QdxQdx == A quantity demanded of commodity x.A quantity demanded of commodity x.
• ff = A function of independent variables contained within the parenthesis.= A function of independent variables contained within the parenthesis.
• PxPx == Price of commodity x.Price of commodity x.
• PoPo = Price of the other commodities.= Price of the other commodities.
• TT = Taste & preferences of household.= Taste & preferences of household.
• EE = Future expectations of change in price= Future expectations of change in price
• Y = Level Of IncomeY = Level Of Income

28. DETERMINANTS OF DEMANDDETERMINANTS OF DEMAND
1.1. Price of the commodityPrice of the commodity
2.2. Prices of related commoditiesPrices of related commodities
3.3. Income of the individualIncome of the individual
4.4. Tastes and preferencesTastes and preferences
5.5. Expectations regarding the futureExpectations regarding the future
6.6. Other factorsOther factors
i.i. Durability of goodsDurability of goods
ii.ii. Size of populationSize of population
iii.iii. Composition of populationComposition of population 2828

29. 2929
Increase in demand graph Decrease in demand graph
Price
Determinants of
Demand
Income
Number of
Buyers Prices of other
goods
Tastes
Expectations
about future
Quality
Supply?
Size of
population

30. 3030
EXCEPTIONS TO THE LAW OFEXCEPTIONS TO THE LAW OF
DEMANDDEMAND
Generally, the amount demanded of good increases
with a decrease in price of the good and vice versa.
In some cases, however, this may not be true. Such
situations are explained below ::
1.1.Giffen goodsGiffen goods
2.2.Conspicuous ConsumptionConspicuous Consumption
3.3.Conspicuous NecessitiesConspicuous Necessities
4.4.Expectation of change in the price of commodityExpectation of change in the price of commodity
5.5.Ignorance of consumersIgnorance of consumers
6.6.EmergenciesEmergencies
7.7.Change in taste or fashion or habit.Change in taste or fashion or habit.

31. CHANGES IN DEMANDCHANGES IN DEMAND
• Changes in demand for a commodity canChanges in demand for a commodity can
be shown through the demand curve in twobe shown through the demand curve in two
ways:ways:
1.1.Movement Along the Demand CurveMovement Along the Demand Curve
2.2. Shifts of the Demand Curve.Shifts of the Demand Curve.
3131

32. 3232
MOVEMENT ALONG THE DEMANDMOVEMENT ALONG THE DEMAND
CURVECURVE
A movement refers to a change along a curve. OnA movement refers to a change along a curve. On
the demand curve, a movement denotes a changethe demand curve, a movement denotes a change
in both price and quantity demanded from onein both price and quantity demanded from one
point to another on the curve. In other words, apoint to another on the curve. In other words, a
movement occurs when a change in the quantitymovement occurs when a change in the quantity
demanded is caused only by a change in price,demanded is caused only by a change in price,
and vice versa.and vice versa.

33. In this case, the demand curve remainsIn this case, the demand curve remains
unchanged. When, as a result of change in price,unchanged. When, as a result of change in price,
the quantity demanded increases or decreases, itthe quantity demanded increases or decreases, it
is technically calledis technically called extension and contractionextension and contraction
in demand.in demand.
3333

34. 3434
Contraction
Expansion
MOVEMENT ALONG THE DEMAND CURVE
Expansion
Here the price of a commodity falls from Rs. 8 to Rs. 2. As a result, therefore, the quantity demanded
increases from 100 units to 400 units. There is extension in demand by 300 units. This movement is from
one point price quantity combination (a) to another point (b) along a given demand curve. On the other
hand, if the price of a good rises from Rs. 2 to Rs. 8, there is contraction in demand by 300 units.

35. 3535
SHIFTS IN THE DEMANDSHIFTS IN THE DEMAND
CURVE.CURVE.
• If one of the non - price determinants of demand, such as the
prices of other goods, income, etc. change & thereby demand
changes, the relevant terms are increase and decrease in
demand.
• For example, if the level of income in community rises, other
factors remaining the same, the demand for the goods
increases. Consumers demand more goods at each price per
period (rise or Increase in demand). The demand curve shifts
upward from he original demand curve indicating that consumers
at each price purchase more units of commodity per unit of time.

36. FACTORS THAT SHIFTFACTORS THAT SHIFT
DEMANDDEMAND
Consumer
Income
Tastes
And
Preferences
Demographics
Expectations
Price of
Related Goods
Number
Of
Buyers
Demand

37. SHIFTS IN THE DEMAND CURVE.
Increase

38. SHIFTS OF THE DEMAND CURVE.
Y

39. 3939
SUMMING UPSUMMING UP
i.i. Extension in demand is due to reduction in price.Extension in demand is due to reduction in price.
ii.ii. Increase in demand occurs due to changes in factors otherIncrease in demand occurs due to changes in factors other
than price.than price.
iii.iii.Contraction in demand is the result of a rise in the priceContraction in demand is the result of a rise in the price
commodity.commodity.
iv.iv. A decrease in demand follows a change in factors other thanA decrease in demand follows a change in factors other than
price.price.
v.v. Changes in demand both increase and decrease representChanges in demand both increase and decrease represent
shifts in the demand curve.shifts in the demand curve.
vi.vi. Changes in the quantity demanded are represented by moveChanges in the quantity demanded are represented by move